S corporations, C corporations and Limited liability companies (LLCs) are all business structures that differ in ownership, taxation, benefits and disadvantages.
Ownership
C corporation can include unlimited number of shareholders including non-US citizens. S corporations can have up to 100 individual shareholders including LLCs, partnerships, or many trusts. S corporations also can’t have non-U.S. citizens or residents as shareholders. LLCs can have an unlimited number of members, including non-U.S. citizens and residents, and can own subsidiaries without restrictions.
Taxation
LLCs are usually taxed as sole proprietorships or partnerships, but they can also elect to be taxed as an S corporation or C corporation. C corporations are the default tax classification for corporations and are taxed at the federal corporate income tax rate. S corporations are also a tax classification that corporations can elect, and they have some tax advantages. For example, S corporations have a single layer of taxation and earnings aren’t subject to FICA tax. C corporations, on the other hand, are subject to double taxation, once at the corporate level and again when dividends are distributed.
Both C and S corps:
- Provide limited liability protection for their owners and shareholders, so the business owners’ personal assets are protected against lawsuits and debt collection is leveled at the corporation.
- Must adhere to compliance standards that require them to adopt bylaws, issue stock, hold regular meetings, file government reports, and pay annual fees and taxes.
- Are required to submit tax return filings for business income and profits.
What are the pros and cons of forming an C Corp?
On the pro side, a C Corp can:
- Issue more than one class of stock, i.e., common and preferred stock
- Grow through virtually unlimited stock sales – essential for companies that want to go public
- Attract investors seeking passive income which helps fuel growth
- Have shareholders who are not U.S. citizens which is great for international businesses
- Own other companies, LLCs, partnerships, and trusts – allowing growth through diversification
- Elect to go public – a major growth step for expanding companies
- Raise business capital without having to give investors voting rights
The cons of forming a C corp include:
- More regulations and reporting responsibilities, e.g., C corps must file annual reports, financial disclosures, and business income taxes, hold regular board meetings, and keep by-laws and voting records on the premises)
- Stricter management requirements, e.g., board of directors and management must be separate entities)
- Higher overall operating costs such as legal fees, payroll, insurance, regulatory compliance—it all adds up
What are the pros and cons of forming an S Corp?
The advantages of structuring as an S Corp are:
- Owner/shareholders do not have to pay federal taxes on the corporation; rather, they enjoy pass-through taxation on income, thus avoiding double taxation
- Self-employment taxes are lower, largely because Social Security and Medicare taxes are lower
- Liability protections—all personal property is protected
- Owners have more flexible accounting options, including use of the QBI
- Management requirements are less rigorous—owners and management do not have to be legally separated, and owners can be classified as employees, which can also yield significant tax savings
- Ownership interests are easier to transfer
The disadvantages of an S corp are:
- Can only have 100 shareholders
- Shareholders must be U.S. citizens or legal residents
- All shareholders have voting rights
- Can only issue one class of common stock
- Must operate domestically
- Difficult or restricted to raise capital
- IRS audit issues on owner wage as “reasonable compensation”
What are the pros and cons of forming an LLC?
The advantages of forming an LLC are:
- LLCs are not required to have a board of directors
- LLCs are allowed to have as many owners (referred to as “members”) as they desire
- Members are not required to be US citizens or residents
- LLC owners can make their own business decisions, whereas corporations have boards of directors and shareholders who participate in business decisions
- LLC owners can also hire managers or choose to appoint officers who make business decisions for the LLC
- LLCs do not require detailed record-keeping, but it’s still important to keep accurate books and accounts
The disadvantages of forming an LLC are:
- LLC owners pay taxes on all net profits from their business, just as sole proprietors do, and self-employment taxes are higher than employee taxes
- LLCs are regulated by state laws, and each state has different rules and fee structures related to setting up and maintaining an LLC
- LLCs cannot issue stock and cannot have shareholders, which may limit options for attracting members to the LLC
Excerpt from Thomson Reuters tax and accounting article